Period

1Q15

Actual vs. Expectations

1Q15 realised net income (RNI) of RM69.9m came in within expectations, making up 29% of consensus estimates and 30% of ours.

Dividends

None, as expected.

Key Results Highlights

QoQ, topline was up by 5% to RM125.4m on double-digit rental reversions upon lease expiries, mostly in 4Q, while recent checks suggest that occupancy is toppish at 99% for both malls. This was on the back of 38% of NLA expiring in Mid Valley (MV) and 33% in The Gardens Mall (TGM) in FY14. NPI margins bounced back from 4Q14 by 7.9ppt to 72% on: (i) better cost saving from lower utilities cost, and (ii) lower operating expense, possibly on lower promotional and advertising cost. That, coupled with slightly lower financing cost (-2%) bumped up RNI by 24% to RM69.9m.

YoY, topline growth was strong, increasing by 10% to RM125.4m due to similar reasons mentioned above. The leap in topline growth is more apparent year-on-year as the bulk of FY14 expiries occur in 4Q. NPI margins improved by 3.9ppt to 72% on: (i) lower utilities cost, and (ii) lower quit rent assessment expenses, while higher interest income (+15%) pushed RNI up by 21% to RM69.9m.

Note that IGBREIT no longer provides a segmental breakdown for MV and TGM.

Outlook

FY15 will see 20% and 0.2% of MV and TGM’s NLA up for expiry, respectively. We have anticipated softer rental reversions of 10% and 9% for MV and TGM in FY15 vs. 15% for both assets in FY14. Our softer rental reversions are due to IGBREITs higher portion of turnover rent (13% vs. other similar-sized malls under our coverage of 2%- 3%) as the implementation of GST in April-15 may affect tenants’ revenue.

The asset acquisition environment appears to be improving as our channel checks suggested that property sellers are becoming more realistic with asking cap rates, while three REITs under our coverage have already done acquisitions in the past 12 months. However, we believe IGBREIT is unlikely to make any acquisitions in the nearterm, despite their low gearing level of 0.24x.

Change to Forecasts

We make no changes to our FY15-16E RNI, while our NDPU is 6.8 sen and 7.1 sen (5.0% and 5.2% yield), respectively.

Rating

Maintain MARKET PERFORM

Valuation

Maintain TP of RM1.37 based on unchanged target gross yield of 5.7% (net: 5.4%) on FY15E GDPS of 7.6 sen (NDPS: 6.8 sen). Our target gross yield is based on +1.8ppt spread (peer average; 1.7ppt) to our target 10- year MGS of 3.90%.

We do not anticipate further downside to our call at this juncture as we believe any potential weakness has been accounted for in the share price. At the same time, we do not foresee any positive re-rating catalyst for IGBREIT, while its FY15E dividend yield is on par with its peers’ average of 5.6%.

Risks to Our Call

(i) Bond yield expansion or compression vs. our target 10-year MGS. (ii) weaker-than-expected rental reversions.

Source: Kenanga Research - 29 Apr 2015